MGEA02 Doccs

University of Toronto Scarborough
MGEA02H3
Introduction to Microeconomics: A Mathematical Approa
Midterm
Fall 2018
Prof. John Parkinson
find more resources at oneclass.com
MEGA02- Lecture 1 – Introduction
• Professor Jack Parkinson

o Office: IC 284
o Phone: 415-287-7339
o Email: [email protected]
o Office Hours: Monday 12-1:30, Fri 11-12
▪ Or by appointment
o Check Querqus regularly for updates
• Grading scheme
o Online assignments: 15%
▪ You need a to purchase a Sapling Plus access code from
UTSC bookstore if you bought an used book
▪ New books come with the code
▪ See instructions on Canvas for how to set up an account
▪ Best 5 out of 6 will count towards the mark
▪ Questions on the assignments will be relatively easier than
questions found on the midterm and final
o Midterm: 35%
▪ 1.5 hours
▪ All multiple choice
o Final: 50%
▪ 3 hours long
▪ On the entire course
• Calculators
o Please bring a non-programmable calculator to exams
• Tutorials start on Sept 11th next week
o Will be held 11 times during the term
o Please read material on canvas and be prepared for each tutorial to
answer the questions
• Topic 1 (outline)

o First principles
▪ Chapter 1
▪ What is microeconomics?
• Basic economic decisions
• Important principles of economics
• Opportunity costs
o The production possibilities frontier
▪ Chapter 2
▪ What is the PPF?
▪ PPF with constant opportunity costs
▪ PPF with increasing opportunity costs
▪ Tradeoffs along a PPF
• Microeconomics
o The study of individual markets in the economy
▪ Demand and supply of a market
▪ Determining price and quantity and what is being changed in
the market
• Eg. Individual households, individual markets
▪ Decision making when it comes to scarce resources
▪ Assume rationality of the parties
• Households wish to maximize the level of satisfaction
and utility
• Suppliers wish to maximize their profits
o Macroeconomics talks about the economy on a larger scale
▪ Eg. Economy in Canada
• What is economics?
o The study of the allocation of scarce resources among competing
uses
▪ How the allocation occurs
o Important concepts
▪ Many resources are scarce which makes choices necessary

• Trade-offs
▪ You must give something to get something
▪ Should I give a little more or less?
• Marginal decisions
▪ People respond to incentives
• Exploit opportunities to make themselves better off
▪ Trade can make everyone better off
• Gains from trade
▪ Markets usually good way to organize economics
▪ Government can sometimes regulate markets to help with
social welfare
• Resources (inputs, or factors of production)
o Land
▪ Location is a very important attribute to how much land is
worth
▪ Minerals of ground
▪ Fertility of land
o Labor
▪ Workers and their human capital (their experiences and
assets and skills)
• Human capital incudes languages spoken,
knowledge, and work experiences
o Capital
▪ Buildings, machinery, tools, equipment used to make output
▪ Productive capital, NOT financial capital (including money,
bonds, stocks)
• Scarcity
o Implies constraints exist and tradeoffs must be made
o Competing uses imply choices have to be made
▪ Basic economic decisions

• What?
o To make
o To buy
• How?
o How much to make it and to charge
• To whom?
o Eg)
▪ Should we make bombs or food?
▪ Should I buy a cellphone or clothes with
the limited amount of money?
• How does a market economy make these decisions?
o Decentralized
▪ Lets a bunch of individual decision makers make their own
choices on what to do
▪ Relies on the rationality of these decision makers
▪ No one person decides everything
• Command economy
o Centralized entity that makes all the decision
▪ What, how, whom
▪ Eg. North Korea
• Mixed economy
o A bit of both market and command
▪ Eg. Canada’s economy
• Opportunity cost
o The cost of taking an action is measured by the value of the next
best alternate action
o We are talking about the value lost if we did something else
o Fundamental concept: if you do something, you have to give up
doing something else
o Explicit cost: are money/monetary costs
o Implicit cost: are non-monetary costs (cost of using own resources)

▪ And did not compensate yourself fairly

▪ Eg. Someone offered a job for 100,000 a year but must give
up firm and draws 60,000 for the firm
• The implicit cost is the missing 40,000 dollars that you
have to give up
o OC = value of the alternate foregone
o OC = explicit costs + implicit costs

MGEA02 – Lecture 2 – Introduction to Microeconomics part 2
o Value of the alternate foregone
▪ The next highest valued alternate use of that resource
▪ OC (opportunity cost)= explicit cost + implicit cost
o Always want to consider the big picture
o Eg. The opportunity cost of attending university (what one needs to
give up)
▪ Full time job
▪ Money
▪ Active social life
▪ Sleep
▪ Travelling
o Does opportunity cost really matter? Do we make decisions
according to opportunity cost?
▪ Yes, it does and we do
▪ Eg. Opportunity cost for an older person to be a full time
student is high, which is why in this room most of the
students are younger
▪ Take into consideration:
• Explicit costs
• Implicit costs
• Cost benefit decisions:
o When we make decisions we make the following assumptions:
▪ 1. Action will be taken if total benefit (TB) is greater than total
cost (TC)
• Value creating actions
▪ 2. If there are more feasible value creating actions than
resources allow then should do the actions with the result of
the biggest difference between total cost and total benefit

• When resources are scarce:

o Choices must be made
▪ 3. Care must be taken to properly calculate both TB and TC
or we might make improper choices
• Must take all opportunity costs into account
o Explicit and implicit costs
• The real cost of using the resources in one way will
be that you give up the output you might have gotten
using them an alternate way
▪ 4. We focus on HOW choices are made and what are the
consequences of those choices
• Individual makes choices about demand and supply
and then markers being those decisions together
o There are trade offs everywhere
• Production possibilities frontier
o First model
o Will look at PPF with constant opportunity cost and increasing
opportunity cost (non-linear)
• What is a PPF
o Shows a set of output possibilities feasible with a fixed amount of
resources and fixed technology
▪ At a moment in time these things are frozen
o Shows set of output possibilities that the production of each good is
the maximum possible given the efficient production of the other
good
▪ Model only has two things being produced
o Will help us think about issues like choices, opportunity costs, and
economic efficiency
o Diagram will show:
▪ Allocations of resources to alternate ones
▪ Choices available to us

▪ Attainable region
▪ Economically efficient and inefficient production bundles
▪ Opportunity costs
▪ Shape of the graph will be important as well
• Linear or concave
• Set up of model
o Economy is endowed with fixed amount of production factors and
given technology
o Can only make X and Y
o Factors of production can be used in production of X and Y
▪ OC (x) = dy/dx
▪ Measures the amount of y that must be given up to get a
little more of good x
▪ Also measures value of alternative foregone
• It is the slope of PPF times -1
▪ OC (y) = dx/dy = - (1/ ((dy/dx)))
• PPF with constant opportunity cost
o Constant opportunity cost implies a fixed amount of one good must
be given up in order to obtain another good
▪ Slope constant
▪ Value of alternate foregone constant
▪ Can be explained by constant marginal product of factor
inputs
o Frontier shows what is attainable
▪ Points above are not attainable
▪ Points along frontier are efficient
▪ Points below are inefficient allocations but are attainable
• PPF with increasing opportunity cost
o Implies an increasing amount of one good must be given up in
order to obtain an additional unit of another
o Value of alternate foregone is increasing

o Slope gets steeper as the number of X produced increases

o Can be explained by diminishing marginal product of factor inputs
o OC(y) = 1/ OC(x)
o Value function of society
▪ V = 3X + 6Y
▪ Maximizes the value of production in society

MGEA02 – Lecture 3 – Competitive market model
• Overview of the competitive market model

o A large numbers of producers compete with one another to satisfy
the wants and needs of consumers
• What is a market?
o Set of institutional arrangements where buyers and sellers go
together to exchange information and negotiate and potentially
make trades
▪ Make trades of goods and services for monetary
compensation
▪ Eg. The farmer’s market outside UTSC
▪ Can be open everyday or depending on hours
o Goods = tangible
o Service = intangible
• What is competition?
o The rivalry between suppliers and services with the goal of
achieving revenue
o Perfectly competitive market
▪ 1. Many buyers, many sellers
▪ 2. Product is homogeneous
• No brand loyalty
• Eg. No apple vs. Samsung phones
▪ 3. Perfect information
• No one gets fooled and makes mistakes
• Everyone has all the info they need
• People are honest
▪ 4. Free entry and exit in long run
• No barriers to enter or exit
o Therefore there is no market power given to
the producers and consumers

o Price competition is the main form

• Demand
o Demand curve
▪ Illustrates the behavior of buyers
▪ Does not need to be linear but usually are assumed to be
▪ It is assumed once again that consumers are rational
▪ Shows the max price consumers and quantity are willing to
pay per unit for any particular quantity
▪ Diminishing marginal utility
• We usually assume, all else the same, our marginal
utility diminishes as we add incremental units of
consumption
• First consumption is satisfactory but the second time
is less and so on
• Utility gets smaller and smaller
o Slope
▪ Negative slope
• Due to diminishing marginal utility
o Voluntary trade between consumers and suppliers
o Change in quantity demand
▪ Involves a movement along the demand curve
o Change in demand
▪ Refers to a shift or decrease in demand due to a shift of the
demand curve
o Shifts in demand curve
▪ Price of a substitute
▪ Income of consumers
▪ Population
▪ Tastes
• Supply
o Supply curve

▪ Behavior of sellers
▪ Does not need to be linear but usually are assumed to be
▪ Shows the min prices suppliers are willing to charge for any
quantity
• This min price equals firms marginal cost of
production and increasing marginal cost
o Makes supply upward sloping
▪ Supply in SR
• Now with existing firms only
• Technology is fixed
o Slope
▪ Positive in the short run
▪ Higher prices are needed to cover the higher marginal cost
of production
▪ In the long run
• Supply is less steeply sloped
• Often horizontal
o Zero slope
o What makes it shift
• Equilibrium
o Occurs when the behavior of buyers and sellers is consistent
▪ Amount buyers want matches the amount sellers want to sell
▪ Prices brings these behaviors into equilibrium
• Prices help the invisible hand to function
• Market is decentralized
o Short run
o Long run

MEGA02 – Lecture 4 – Demand and Utility
• Last week’s class we learned about:

o The competitive market model
o The definition of a market
o The definition of competition
o Demand
o Supply
• Equilibrium
o What is it?
▪ A stable situation with no forces promoting change in the
price or quantity traded
• The intersection point on a graph
o Linear so it only intersects once
o Height of supply curve represents marginal
producer’s cost
o Height of demand curve represents marginal
utility cost
• Everything else is held frozen
• What consumers wish to buy is equal to the quantity
sellers wish to sell
• It stays there unless something makes one of the
curves shift
o Quantity demand = quantity supplied
▪ Results in the market being in equilibrium
o Is a market ever really in equilibrium?
▪ Depends on how stable the market really is
• Price
o Price acts as a signaling device
▪ Provides information on the market
• Also provides pressure

▪ Applies to both demanders and suppliers

▪ Acts in a way to make competitive market move into
equilibrium
o Price acts to allocate resources
▪ Determines which suppliers are successful
▪ How much output is being produced
• Shifts
o Anything but price that matters for supply shifts the supply curve
o Increase in demand
▪ Demand shifts up/right
▪ Cause of increase quantity in supply
o Increase in price
▪ Does not occur on its own
▪ Quantity supplied goes up
▪ Quantity demanded goes up
• Rise in consumer incomes – normal good
▪ Increase in price and quantity
o Demand curve shifts up and to the right
▪ New equilibrium has higher price and demand
• Rise in consumer incomes – inferior good
o Decrease in demand
▪ Decrease in price and decrease in quantity
o Demand curve shifts down and left
▪ New equilibrium has lower price and less demand
• Effect of rise in price of a substitute
▪ Increase in price and quantity
o Demand curve shifts up and to the right
▪ New equilibrium has higher price and higher demand
• Effect of rise in price of a complement

▪ Decrease in price and decrease in quantity
o Demand curve shifts down and to the left
▪ New equilibrium has less price and less demand
• Effect of decline in population on housing market
▪ Decrease in population and quantity
o Equilibrium shifts down and to the left
▪ Decrease in price
• Rise in rental price of capital equipment on a market for hot and cold
rolled steel
o Supply goes down
▪ Price goes up and quantity goes down
o Equilibrium goes up and to the left
• Effect of rise in wages on the market for hamburgers
o Price goes up
▪ Demand and supply goes up
• Two events at the same time
o Increase costs faced by universities and increased taste for
university education
▪ Size of shift matters
▪ Supply goes down and demand goes up
▪ Price increases and quantity depends on the exact size of
shift
▪ Equilibrium goes straight up
o Increase in price of gasoline on the market for new cars and rise in
consumer incomes
▪ Automobiles are a normal good
▪ Relative shift size matters
• Interference

o Sometimes government will not give us that freedom and will

interfere to change the market
o Price ceiling
▪ A maximum allowed price by law
▪ Rent controls
• A form of price ceiling
• Excess demand that is not satisfied
• Government tries to make housing more affordable
▪ Consequences of rigorously enforced price ceiling:
• Shortages
o Excess demand
• Black market
• Deterioration of properties
o Price floor
▪ The lowest price charged allowed by law
▪ Minimum wages
• Form of price floor
• Can result in unemployment due to excess supply
▪ Minimum prices in agriculture
▪ Consequences of rigorously enforcing price floor:
• Excess supply
o Unemployment
• Illegal workers
• Resources will not move to new occupations
o If market cannot reach equilibrium lowest quantity of demand or
supply will prevail
▪ The short end of the market determines the quantity
exchanged/traded
▪ The left hand side of the graph is what matters

MGEA02 – Lecture 5 – The demand curve
▪ We will learn about for this class and next class:

o Demand and utility
▪ How they are connected topics
▪ Explaining and understanding demand curves
• Why are demand curves negatively sloped?
• How do we interpret a point on the demand curve?
o What does the point mean?
• How do we interpret an area under the demand
curve?
• How do demand curves relate to the behavior of
consumers and well being of consumers?
▪ Touch up on demand curve
o Demand curve is a reflection of utility
▪ Well being, satisfaction, or happiness of consumers
▪ Utility is measured in dollars
• This is a strong assumption
o Demand curves can be used to measure willingness to pay for a
good by consumers
▪ Assume consumer is rational
o Consumers are making decisions designed to max their own well
being
▪ Utility
▪ They are only able to consumer so much due to their income
but try to make the most out of their income
▪ Total Utility function
o Shape
▪ Curve
o Marginal utility
▪ Linear

▪ Simple derivative
▪ Marginal Utility = dU/dQ
▪ Marginal utility diminished
▪ MU > 0
• Positive MU
▪ dMU/dQ = -2 < 0
• Diminishing MU
▪ We ignore the part of u where MU < 0 and for increasing MU
▪ Net Gain
o The difference between the money the seller has to pay and the
utility from consumers
▪ Consumer surplus
▪ CS = U (Q) – (P (Q))
▪ Drawn on graph as straight line
▪ The optimal purchase rule (OPR)
o Keep purchasing the good until the point where the MU is equal to
the price charged per unit P
▪ MU = P
▪ Max consumer surplus
o dCS/ dQ = dU/dQ – P = 0
o Therefore when dU/dQ = P
▪ Consumer surplus is maximized
o When marginal utility = price
▪ Consumer surplus is maximized
o Rational consumers follow the optimal purchase rule (OPR)
▪ The demand curve is the result
▪ The demand curve and MU curve are the same
o TE = P times Q = total expenditure
o P = price per unit (given)
o MU = P

▪ Equations
o 1. U = Q – Q^2
▪ 20Q – Q^2
▪ Utility
o 2. MU = dU/dQ
▪ 20 – 2Q
▪ Marginal utility
o 3. OPR = P – MU
▪ 20 – 2Q
▪ Set P equal to MU
▪ Demand
▪ Demand curve is derived form utility curve
o Curves can be derived from one another
▪ Optimal purchase rule
o CS= u – P times Q
o When MU > P
▪ We have too little consumed Q
o The next unit returns more additional utility (MU) than it costs to buy
P
o If we raise Q this causes
▪ CS to go up
▪ MU to decrease
o Keep doing this until MU falls to where MU = P
o When MU < P
▪ We have too much Q
▪ This unit lowered CS
▪ We should decrease Q until
• Cs increases
• MU increases
• Keep doing this until MU rises to where MU = P
o Optimal level

o When MU = Q
▪ We should not change Q
▪ We are at the level of Q that maximizes consumer surplus
▪ The last unit bought returns an increase in utility (MU)
exactly equal to its cost
o Summary of the marginal utility curve/demand curve:
▪ The MU curve for a good is the demand curve for that good
because the max willingness to pay for any good Is the
marginal utility derived from consuming the last unit of that
good
▪ Areas under demand curve
o We can interpret areas under demand curve as total utility
• Measured in dollars
▪ Total expenditure = P times Q = TE
▪ Consumer surplus = U (Q) – P (Q)
▪ Maximized CS by setting Q such that P = MU
o Interpret the area under the demand curve and above the market
price (P) as consumer surplus
▪ Demand for a good
o Individuals consume because they gain utility
▪ MU > 0
o Consumers try to max their consumer surplus
▪ They choose amount to consume
▪ Max CS
o Consumer surplus is dollar value of utility
▪ Received by consumers above the cost of purchase
▪ CS = U (Q) – P (Q)
o Consumers max CS by following OPR
▪ Choosing amount of good such that MU = P
• Or dU/dQ = P
▪ This is called the individual demand curve

MGEA02 – Lecture 6 – The demand curve part 2
▪ Last week’s agenda:

o Consumer surplus
▪ How to use it and what it is
o Optimal purchase rules (OPR)
o Demand curve
o How the marginal utility and price are connected
▪ Equations
o U (Q) = Utility function
▪ Equation is typically given in a problem
▪ Represents the level of happiness/ satisfaction
▪ Can be linear and non linear
• Linear dominates non linear when Q is small
• Vise versa as Q gets larger
▪ Assume that the consumer is rational
• Will not over consume
• Marginal utility is non- negative
o MU = Marginal utility = dU/dQ
▪ Derived from the utility function
▪ Change in the total utility
• The first derivative of the utility function
• MU cannot be negative but may be 0
o Rational consumer is assumed
o Optimal purchase rule:
▪ P = MU = OPR
▪ P = MU is the optimal
▪ Sets out Q that maximizes the CS
▪ Once this is done, the demand curve is found
▪ P and MU are connected
▪ Total expenditure
o 1) Area under the demand curve F up to Q = Q0 is equal to the total
utility of Q0
▪ U (Q0) = TWTP
o 2) TE = P0 (Q0)
▪ Total expenditure
▪ For any given P and its related Q
o 3) CS = U (Q) – TE
▪ = U (Q) – P (Q)
▪ Consumer surplus
▪ This is the area under demand
▪ Applications
o Utility function
▪ P = 100 – Q
▪ P = price of a CD in dollars
▪ Q = quantity of CDs bought per year
• 1) Marginal value of a jazz CD is 60, if Q = 40
o P = 100 – 40 = 60
o This 60 is the marginal utility
• 2) P = 60, how many jazz CDs will be purchased
annually
o If P = 60
o 60 = 100 – Q
o Q = 40
• 3) What is the total annual utility purchased at this
price?
o This is the area under the demand up to Q =
40
• 4) How much consumer surplus would he receive at
the price of 60 dollars per CD
o CS = U – TE
MGEA02 – Lecture 7 – Elasticity, tax incidence and tax burden
▪ Elasticity
o Taxes imposed on a market usually alters the social welfare and
equilibrium
o What is elasticity?
▪ A key property of demand and supply curves
▪ It is the sensitivity or responsiveness of supply or demand
• Changes in one variable as another changes
• Quantity demanded depends on price, seasonality,
income, complimentary products
o Quantity demanded changes depending on
these factors
o Usually price is the factor that is focused on
o Elasticity of demand
▪ Sensitivity of quantity demanded to
changes in price of product
▪ Slope plays a role but elasticity is more
than the slope
▪ Flatter curve called more elastic
• More responsive
▪ Steeper curve is less elastic
• More inelastic
• Unresponsive
▪ Demand depends on many different
things
▪ ED = |percentage change in quantity
demanded/ percentage change in price|
• This is an absolute value
• At a point
▪ Own price elasticity of demand

• How consumers respond to a

change in the market price as we
move along the demand curve
o Elasticity of supply
▪ Sensitivity of quantity of supplied to
change in the price of product
▪ Es = percentage change in quantity
supplied / percentage change in price
▪ Measuring this as we move from one
point to another along the supply curve
o What affects elasticity of demand?
▪ 1. Availability of close substitutes is key
• Cheaper substitutes
▪ 2. The amount spent on this good by the consumer
▪ 3. Cost of switching products
• If price is high the demand curve is steeper
▪ 4. Degree of necessity or luxury and habitual consumption
• Example
o Bubble tea is overpriced but some students
consume it habitually
o Professor Parkinson and his coke drinking
o Food is necessary and some things are not,
there are different degrees of elasticity for them
▪ 5. Peak and off- peak demand
• Example
o Ice- cream is consumed more often in the
summer than winter
▪ 6. The breadth of definition of a good or service
▪ 7. Time period following price change
• Short run vs. long run
• We alter behavior on longer term

o Terminology
▪ Demand is elastic
• ED > 1
• If P increases by 1% Q decrease more than 1%
▪ Demand is inelastic
• ED < 1
• If P increase by 1% Q decrease by less than 1%
▪ Demand is Unit(ary) elastic
• ED = 1
• If P increase by 1% Q decreases by 1%
o If the demand curve is linear, elasticity is different at every point on
the curve
o Total expenditure
▪ TE = P (Q)
▪ Depends on elasticity
▪ Elasticity of demand is related to:
• Total expenditure of consumers
• TR of firms
• Government tax revenue
▪ Elasticity and taxation
o Exercise tax
▪ Tax focused on certain items big in demand
▪ Example
• Gasoline
▪ Flat tax
• Charged due to volume or per item
▪ Ad- valorem tax
• Charged on percentages of items
▪ Questions on taxation
o 1. Who really pays an excise tax?
▪ Economically phrases

• What is the incidence of the excise tax?

o 2. How does tax affect the allocation of society’s economic
resources and economic well-being?
▪ Economically phrased
• How much is the excess burden of an excise tax?
▪ Incidence of excise tax
o Political science
▪ Law and government are in charge and levying on the
consumers or producers
▪ This is not necessarily correct
o Economics
▪ Statutory incidence does not equal economic incidence
▪ Market decides who bears the tax
• Depends how consumers and producers react to the
law
• Demand and supply elasticity

MEGA02 – Lecture 8 – Government Taxes on the demand and supply

curves
▪ Equilibrium and the effect of taxes

o Tax drives a wedge between buyers and sellers
▪ Buyers pay one price (which includes the tax) but sellers
receive another price net of the tax
▪ Some of the money is going to government and some goes
to the firms
▪ The tax collected is a quantity
▪ New equilibrium price
o We can show this on the graph
▪ If the tax is levied on consumers, we will have two demand
curves
• Tax drives these two curves apart
• 1) One represents the amount of buyers pay
o Including tax
o D curve
• 2) The other represents the amount the sellers
receive
o Net of the tax
o D – T curve
o However, if the tax is levied on sellers
▪ If the tax is levied on producers, we will also have two supply
curves
• 1) The original supply curve S that represents the net
amount sellers receive for supplying different
numbers of units of goods
o S curve

• 2) The S + T curve represents the amount buyers will

Pay for the same number of units of the good
including the tax
o S + T curve
o Can derive S + T curve from the S curve
o Tax on consumers and buyers
▪ Tax creates a wedge as mentioned before
• P1 = Ps + T
• P1
o Paid by consumers
• Ps
o Paid by suppliers
• T
o Tax per unit
o Recipe for new equilibrium with tax
▪ T = number per unit on consumers
• 1. Find (D - T) curve
• 2. Find where (D - T) = s to determine Q1
• 3. Plug Q1 into (D-T) to get Ps
o Plug Q1 into S to get Ps
• 4. Plug Q1 into D to get P1
▪ Buyer and sellers
o Buyers share of tax
▪ P1 – P0 = BS
o Sellers share of tax
▪ P1 – Ps = SS
• Statutory incidence does not equal economic
incidence
• Tax is levied by governments on either consumers or
producers
o However, tax is generally shared by both buyers and sellers

▪ Amount that buyers pay vs. amount sellers pay depends on

elasticity of demand and elasticity of supply according to
formula:
• BS/SS = Es/Ed
o Tax on buyers
▪ D–T=S
o Tax on sellers
▪ S+T=D
o Both used to determine Q
o Prices must be the same when Q is plugged into the curves
▪ Excess burden of an excise tax
o When a tax is levied, it changes the behavior of buyers and sellers
▪ 1) Because the gross price is higher
• Pi is higher
• Consumers want to consume less
▪ 2) Because the net price is lower
• Ps = Pi – T is lower
• Suppliers want to supply less
o Less output is produced and consumed in this industry
▪ For instances, economic resources are reallocated to other
industries away from this industry
• Might be another job for a different wage but more
dangerous
▪ Well- being (economic surplus or total welfare)
o Can be measured as the sum
▪ Consumer surplus + producer surplus + government surplus
= the net benefit of society
o Consumer surplus
▪ Is the surplus of the consumer utility over the amount paid
for the good

• The net benefit to consumers

• CS = U – TE
o Producer surplus
▪ Is the surplus of revenues to producers over the amount
necessary to get them to the supply the good
• The net benefit to producers
• PS = TR – TVC
o Government surplus
▪ Is equal to the revenue tax generates
▪ Benefit of taxes
o The government (society) needs tax revenue to pay the cost of
important social programs such as welfare, hospitals, schools,
roads etc.
o Other possible costs outside this market for tax:
▪ Questions of equity
▪ Other efficiency angles

MEGA02 – Lecture 9 – Production: Productivity and costs
• Objective
o What lies behind the supply curve in the SB?
o To understand diminishing marginal productivity and the shapes of
typical curves in the short run
▪ To understand the supply curve
▪ Decisions by firms about how much to produce and supply
▪ To maximize profit
• They hire in the labor
• Rent capital
• Use available technology
• Make output and sell it for the most profit
o A loss may also occur if not careful
• Economic profit
o This is economic profit not accounting profit
o Competitive market place
▪ Assuming perfect competition
▪ Output price is not controlled by owner
o Includes implicit opportunity costs of owner’s time and capital
▪ T = TR – TC
▪ Economic profit = (total revenue) – (total cost)
▪ May not be positive depending on profit or loss
• May also be zero
▪ Total costs includes all explicit and implicit costs
• Pay for use of own resources
o There is a fixed amount of capital
▪ The more capital the more productive labor is
▪ Marginal cost and average cost curves will be positive as
long as they are fixed inputs in the short run
• Technology

o Most firms have no control over the production technology available

▪ Must adopt existing technology
o q = f(K,L)
▪ K = inputs of physical capital that is utilized
• Machinery, buildings
▪ L = inputs of labor (employed)
• Hours of standardized workers
• Cobb – Douglas function
o A production function
o q = (K)^A(L)^B
o A and B are parameters of the Cobb – Douglas function
o A and B are greater than 0
o A and B are less than 1
▪ Even simpler: A = B = 0.5
• q = (KL)^0.5
• Time Periods
o Short run
▪ Period too short for firms to change production capacity of
existing technology
▪ K is fixed
o Long run
▪ Period long enough for firms to change plant capacity and
for new firms to enter or exit the industry
▪ K can vary
o Very long run
▪ Period long enough for technology to perhaps change
o q = f (K,L)
• Total economic cost of production
o Production is linked to costs
o TC = PkK + PlL
▪ PkK = rental cost of capital equipment

▪ PlL = rental cost of labor

• Where:
o Pk = the rental price per unit of capital
equipment
o Pl = the rental price per unit of labor
▪ For instances, the wage rate per hour
for a worker
o K = the number of units of capital equipment
utilized
o L = the number of units of labor employed
▪ For instances, the number of hours of
labor used to produce something

MGEA02 – Lecture 10 – Production, productivity and costs part 2
• Midterm Information
o Saturday, October 20th, 2018
▪ 9:00 – 10:30am
▪ Please show up on time
▪ Bring your T card
▪ Bring pencils for the Scranton
o Bring a non-programmable calculator!!!
▪ No graphing calculators
o Find your room on Quercus
o Topic 1 – 5 will be covered
▪ See lecture slides, detailed reading list and read textbook
o Exam will consist of 25 multiple choice questions
• Characteristics shapes of cost curves in the short run
o Most informative curves to look at and draw:
▪ Marginal cost curve
• J-shaped and upward slopping
• Initially declines, reaches a certain minimum and then
rises dramatically
• Initially increased specialization causes marginal cost
to decline
• Fixed K input spread thinner and then drives marginal
cost up
▪ Average cost curve
• It is a curved U shape (along with the AVC) because:
o 1) When MC < AVC
▪ Implies the incremental variable cost to
make an additional unit of output is
smaller than the AVC

▪ Therefore, when we re-calculate the

AVC it declines
o 2) When MC = AVC
▪ The incremental cost of an additional
unit of output is equal to the AVC
▪ Therefore, AVC neither falls nor rises
• It is at a minimum
• Slope is zero at that minimum
o 3) When MC > AVC
▪ The MC of an additional unit produced
exceeds the AVC of production (up to
this point)
▪ Therefore, when we re-calculate the
AVC we find that it has risen
• Reaches minimum just as they cross the marginal
cost
• Marginal cost is below AVC makes AVC decline
• As MC rises, AVC decreases less
• When MC rises above AVC, then AVC starts to
increase
▪ Average variable cost curve
• A curved U shape
• Same as AC
o Average fixed cost curve
▪ Shaped as lazy L
▪ Steady decline
▪ AFC = (FC/g)
▪ As g rises, AFC declines
• FC is fixed
• Law of diminishing marginal product

o As more and more of a variable input is combined with a fixed

input, at some point the marginal product of the variable input will
inevitably decline
o MPL will reach a max at one point
o Marginal cost increases due to diminishing MPL
▪ Same thing
▪ Knowing cost well equals knowing productivity well

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University of Toronto Scarborough

MEGA02- Lecture 1 – Introduction

• Professor Jack Parkinson

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▪ And did not compensate yourself fairly

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MGEA02 – Lecture 2 – Introduction to Microeconomics part 2

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• When resources are scarce:

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o Slope gets steeper as the number of X produced increases

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MGEA02 – Lecture 3 – Competitive market model

• Overview of the competitive market model

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o Price competition is the main form

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MEGA02 – Lecture 4 – Demand and Utility

• Last week’s class we learned about:

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▪ Applies to both demanders and suppliers

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o Sometimes government will not give us that freedom and will

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MGEA02 – Lecture 5 – The demand curve

▪ We will learn about for this class and next class:

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▪ Last week’s agenda:

MGEA02 – Lecture 7 – Elasticity, tax incidence and tax burden

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• How consumers respond to a

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• What is the incidence of the excise tax?

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MEGA02 – Lecture 8 – Government Taxes on the demand and supply

▪ Equilibrium and the effect of taxes

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• 2) The S + T curve represents the amount buyers will

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▪ Amount that buyers pay vs. amount sellers pay depends on

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• The net benefit to consumers

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MEGA02 – Lecture 9 – Production: Productivity and costs

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o Most firms have no control over the production technology available

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▪ PlL = rental cost of labor

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